WASHINGTON - JPMorgan Chase & Co. has agreed to pay $153.6 million to settle civil fraud charges that it misled buyers of complex mortgage investments just as the U.S. housing market was collapsing.
J.P. Morgan Securities, a division of the powerful Wall Street bank, failed to tell investors that a hedge fund helped select the investment portfolio and then bet that the portfolio would fail, the Securities and Exchange Commission said.
Among the investors who lost money on the deal were autoworkers for General Motors, a Lutheran financial organization in Minneapolis and a retirement services company in Topeka, Kansas.
The settlement announced Tuesday is one of the most significant legal actions targeting Wall Street's role in the 2008 financial crisis. It comes a year after Goldman Sachs & Co. paid $550 million to settle similar charges.
Still, the settlement amounts to less than 1 percent of the bank's 2010 net income of $17.4 billion or less than what JPMorgan earns in one week.
In its announcement, the SEC also said it had charged Edward Steffelin with misleading investors. Steffelin headed the team at GSCP, an investment firm that was supposed to have been selecting the portfolio of mortgage securities in the $1.1 billion deal.
The SEC alleged that Steffelin knew that hedge fund Magnetar Capital was directly involved in choosing the securities and was seeking a job with Magnetar at the time. Steffelin has not reached a settlement with regulators.
His lawyer, Alex Lipman, said the SEC was making Steffelin a scapegoat in its case against JPMorgan, "to attach a name and a face" to it.
As part of the JPMorgan settlement, investors who were harmed will get back all of their money, the SEC said. JPMorgan also agreed to improve the way it reviews and approves mortgage securities transactions.
JPMorgan neither admitted nor denied wrongdoing under the settlement. The bank released a statement saying it lost nearly $900 million on the investment. It also noted that it reviewed similar mortgage investments and voluntarily paid $56 million to compensate some investors in those deals.
The bank agreed to settle the charges two weeks after Jamie Dimon, CEO of JPMorgan Chase & Co., complained to Federal Reserve Chairman Ben Bernanke that new financial regulations designed to prevent another financial crisis were too burdensome on banks.
In a related action Monday, another federal agency, the National Credit Union Administration, sued JPMorgan Securities seeking to recover $278 million in losses on securities tied to risky mortgages that were purchased by five wholesale credit unions that failed in 2009 and 2010. The NCUA also sued Royal Bank of Scotland PLC for $565 million in damages over the same issue.
Regulators have been investigating a number of major banks' actions ahead of the financial crisis. More charges are expected.
Magnetar wasn't charged in the SEC action. SEC enforcement chief Robert Khuzami said the hedge fund "was not responsible for those disclosures to investors." But he said such deals "remain a high priority for the SEC."
Magnetar essentially made a $600 million bet that the investments would fail once the deal closed in May 2007, the SEC said. Just one month earlier, JPMorgan had launched a "frantic global sales effort" going beyond its traditional customers to sell mortgage securities, according to the agency's suit.
Khuzami said the JPMorgan case, at its core, is about getting investors truthful information about their investment options.
"The appropriate disclosures would have been to inform investors that an entity with economic interests adverse to their own was involved in selecting the portfolio," he said.
JPMorgan sold about $150 million in those securities to more than a dozen financial institutions that lost nearly their entire investment, the SEC said. Under the settlement, nearly $126 million of the $153.6 million will be returned to investors. The rest will go to the U.S. Treasury.
The investors included Thrivent Financial for Lutherans, a faith-based membership organization based in Minneapolis; Security Benefit Corp., an insurance and retirement services company based in Topeka, Kansas; General Motors Asset Management, which manages the automaker's pension plans; and several Asian financial institutions such as Tokyo Star Bank, Far Glory Life Insurance Co. Ltd., Taiwan Life Insurance Co. Ltd. and East Asia Asset Management Ltd.
The penalty is the biggest since Goldman Sachs & Co. settled civil fraud charges last summer. The $550 million that Goldman paid was the largest penalty against a Wall Street firm in SEC history. The Goldman settlement amounted to less than 5 percent of Goldman's 2009 net income of $12.2 billion after payment of dividends to preferred shareholders or a little more than two weeks of net income.
Goldman was accused of steering investors toward mortgage investments without telling the buyers that the securities had been crafted with input from a client that was betting on them to fail.